But the traumatic post-Brexit exodus from property unit trusts provided a scary moment of truth.
No fewer than 17 of these funds had to suspend investor redemptions after the EU referendum vote. The concern was that the UK commercial property market would be less attractive for international property investors and that it would implode. This prospect was alarming for property fund managers. Faced with a rush of retail investors seeking immediate redemption of their units, they would be forced into sales of properties that they had planned to hold for the longer term. A brutal example of such fire sales occurred at the UK property fund managed by Aberdeen Asset Management. At the height of the redemption rush it pressed for a seven-day completion on the sale of a West London commercial property.
Trading in the £3 billion fund was temporarily suspended though investors were told they could sell their units at a 17 per cent discount. The building was duly sold for a reported £89 million – some £11m less than the original asking price. The crisis sparked by the rush for redemptions exposes the serious danger into which property unit trusts can fall – and it is not the first time that this specialist sector has faced this problem.
It also highlights the critical distinction between open and closed end funds. Open-ended funds (unit trusts and OEICs) have to be constantly ready to meet investor redemptions, obliging them to keep a significant percentage of the fund in cash. In extreme periods such as the immediate post-Brexit turmoil, property assets have to be sold – running diametrically counter to the appeal of commercial property as a long term capital asset. In marked contrast, specialist property investment trusts are closed-end vehicles – the managers have a fixed amount to invest in the sector and because of the structure of the trust they are insulated from the ups and downs of investor purchases and sales.
They are not, of course, immune from rises and falls in commercial property values – property investment trusts suffered falls of 20 per cent and more. But closed-end funds are shielded from the pressures that can lead to forced sales of property. Little wonder there is now pressure on the Investment Association to push for reform of the open-ended property sector. Suggestions include changes to terms and conditions that would restrict unit trading windows to, say, once every three months, giving time for managers to sell properties in a more orderly manner.
Meanwhile, the good news is that prices of both open- and closed-end funds have recovered from the low points back in late June and early July.
A particularly encouraging sign is that Standard Life Investments has reopened its £2.6bn UK Real Estate fund. The fund will be reopened from midday on 17 October, following similar moves by Henderson and Threadneedle. But the scars of this episode will remain. Investor trust will be hard to rebuild after the imposition of blocks on redemptions, while the funds will now be tempted to keep even higher levels of liquidity to deal with any repeat of the crisis. And that in turn will act as a drag on investor returns.
The curse of British assets
For years F&C Investments managed the income-orientated British Assets Trust out of Edinburgh. It may not have “shot out the lights”, but for ten years manager Julie Dent did a competent job in running a defensive trust with solid dividend credentials. Then in 2011 came the change-makers.
Management was handed to BlackRock, which changed the trust name to the more zingy “BlackRock Income Strategies Trust”. Performance failed to meet expectations and last year BlackRock brought in a new fund manager, Adam Ryan, with a “free to roam” brief, able to invest across various geographies and asset classes including bonds and “volatility strategies”. The objective was to achieve a real after-inflation return of 4 per cent.
Now BlackRock faces the threat of being sacked from the trust. With the share price down 15 per cent so far this year, the trust board has launched a “strategic review” that could see the investment contract given to another fund manager.
A clear strategy for longer than the day after tomorrow would be appreciated.